Beau Hays
Hays, Potter & Martin, LLP
Peachtree Corners, GA
TAGGART v LORENZEN, __ U.S. __, (No. 18-489, June 3, 2019)
A unanimous
Supreme Court has announced a standard of review for contempt actions based
upon the discharge injunction in §524(a)(2), which differs from that
applied by any court previously considering the question: A creditor may be in civil contempt for
violating the discharge injunction if there is “no fair ground of doubt” as to
whether the order barred the creditor’s conduct. The Court specifically labeled the limits of
this doubt as being “when there is no objectively reasonable basis for
concluding that the creditor’s conduct might be lawful.”
Previous to
this pronouncement, courts had been applying what was generally called a “strict
liability” standard – a simple two-prong test of (1) was the creditor aware of
the discharge order and (2) did the creditor intend the action violated the
Order. “[T]his court adopted a
two-pronged test to determine willfulness in violating the automatic stay
provision of § 362. Under this test the court will find the defendant in
contempt if it: ‘(1) knew that the automatic stay was invoked and (2) intended
the actions which violated the stay.’ This test is likewise applicable to
determining willfulness for violations of the discharge injunction of § 524.” In re
Hardy, 97 F.3d 1384, 1390 (11th Cir., 1996). In the Taggart
case, the Bankruptcy Court for District of Oregon followed the “strict
liability” standard in sanctioning the creditor’s conduct; the good faith
belief of the creditor that its actions were not a violation of the discharge
injunction was irrelevant to the analysis.
The flaw
in this mechanistic approach is evident from the facts in the Taggart case. The decision by the Ninth Circuit BAP spends
six pages reciting the facts which led to the Bankruptcy Court’s decision to
sanction the creditor. Included in that
lengthy tale is the fact that both an Oregon state trial court and the
Bankruptcy Court itself had previously determined that the creditor’s action
was not a violation of the discharge injunction. After the U.S. District Court over-ruled the
Bankruptcy Court’s finding, the case went back to the Bankruptcy Court, which
was placed in the odd position of determining the sanction for contempt
resulting from action the Court had previously approved. The creditor appealed the $100+k sanction
award to the Ninth Circuit BAP.
The BAP
reversed the Bankruptcy Court. After
reviewing the usual strict liability standard, the BAP focused on the first
prong of the test, whether the creditor had “actual knowledge” that the
discharge order applied to its actions.
Since the facts of the case show that, in large part, the post-discharge
litigation revolved primarily around whether the claims were discharged at all,
the BAP found that until that issue had been decided adversely to the
creditor, the creditor “could not possibly have been aware that the discharge
injunction was applicable.” Emmert v Taggert, 548 B.R. 275, 291 (9th
Cir BAP 2016). As the BAP noted, the
decision by the US District Court that the injunction did apply actually ended
the creditor’s actions – and the BAP was unwilling to sanction a party for
simply litigating a disputed issue.
The Debtor
then appealed to the Ninth Circuit, which affirmed the BAP while changing the
analysis used to determine that the creditor had not been in contempt. Where the BAP focused on the creditor’s
knowledge of the applicability of the discharge injunction, the Ninth Circuit
ruled that – as to this first prong – “the creditor’s good faith belief that
the discharge injunction does not apply to the creditor’s claim precludes a
finding of contempt, even if the creditor’s belief is unreasonable.” Lorenzen
v Taggert, 888 F.3d 438, 444 (9th Cir. 2018). As the creditor here clearly had a good faith
belief, the contempt finding was held to be erroneous.
The Debtor
applied for certiorari to the Supreme Court, to challenge the Ninth Circuit’s
“good faith belief” standard. The Court
agreed with the Debtor that the Ninth Circuit was wrong, but also rejected the
“strict liability” approach applied in the Bankruptcy Court and urged by the
Debtor.
Instead,
the Court found that the test to be applied is whether there is “no objectively
reasonable basis” for the creditor’s conduct.
(The Court did not directly declare that the two-prong analysis is
overruled, but the discussion makes clear that the Court did not believe that
the “strict liability analysis is appropriate at all.) The Court looked at this issue from the
traditional principles of civil contempt when applied to other injunction
violations. The Court emphasized that,
outside the bankruptcy context, contempt is not appropriate “where there is a
fair ground of doubt as to the wrongfulness of the Defendant’s conduct.” [Page 6, cit. omitted] The Court made plain that the creditor’s
subjective belief is not decisive (as the Ninth Circuit had found) but might
assist the court in deciding what sanction – if any – would be appropriate.
Since the
courts below had not applied this “objectively reasonable basis” standard, the
case was remanded. Given the Bankruptcy
Court’s prior conclusion that the creditor was correct in claiming that the
injunction did not apply, it seems likely that that Court will conclude the
creditor had the requisite “fair ground of doubt” necessary to avoid sanction
for contempt.
While not
as creditor-friendly as the Ninth Circuit’s “good faith basis” standard would
have been, the Taggert opinion does
give a glimmer of hope to creditors in discharge injunction litigation. It may not be often that the “fair ground of
doubt” can be established, but compared to the strict liability test utilized
up to this point, a creditor with a credible argument may proceed with the
thought that it may avoid a sanction simply for trying.
An even
more encouraging note for creditors comes in the final paragraph of the Taggert
opinion. The Debtor contended that a
strict liability approach would be consistent with the standard used to remedy
stay violations. The Court distinguished
the specific language in §362
(“willful violations”) with the general authority under
§105, but then commented in a parenthetical that “willful” is also not
typically associated with strict liability.
The Court noted that it was not deciding whether “willful” in §362 would
support a strict liability standard, but the implication is that the Court would
view sympathetically a creditor sanctioned for an objectively reasonable action
but ultimately found to violate the automatic stay.